Economically Thinking

Past President of the European Engineering Industries Association Edward G Krubasik declares that it is time to talk about smart growth and restructuring…

Many economists are questioning the present
austerity focus of Eurozone countries, arguing
that restructuring alone will not solve the
Eurozone problems. In extreme cases, it could possibly
even increase debt to GDP as a result of GDP shrinkage.
Indeed, some economists have even been arguing to avoid
restructuring and rather focus on growth through
continuing deficit spending with less fear of inflation.
Many US experts have overlooked the fact that Europeans
and most Asians have always been savers, while US
Americans have always been living with more debt. Thus
inflation has a totally different effect on the two groups.
As in industry, the goal of restructuring national
economies should be to lay the foundations for healthy
growth; to create competitive cost structures and
organisations that enable sustainable growth in order to
rebuild a solid balance sheet to regain the confidence of
financial markets. An aggressive growth programme has to
be based on healthy structures. Thus, as in industry, in
most national turnaround cases, growth programmes will
follow restructuring ones.On the other hand, restructuring can be much more than
deficit and debt reduction – growth is not equal to deficit
spending. Restructuring can be regulatory restructuring of
parts of the economy and regulation for more
competition, as EU history shows. Successful regulatory
EU measures to open closed markets to competition –
thus restructuring entire industry sectors (as in mobile
telecommunications) – resulted in significant growth of
those players. Similarly, growth can be different from
deficit spending: EU climate initiatives via regulation,
standard setting and financing schemes based on energy
tariffs and reviews and are highlights of growth without deficit spending.
Mobilising private sector investment (instead of
taxpayers’ money) may be the call of the day. Growth
without deficit spending could be called smart growth.
After 10 years of running off track, the Eurozone (and EU)
needs a well-balanced but forceful programme of
restructuring and growth, including fixing euro design
flaws. A complete programme package could not only be a
way to repair eurozone economies, but also a method to
restore the confidence of financial investors and EUcitizens alike. There are five key measures that such a
programme should display.
Stop the vicious cycle of mistrust
Let’s be glad to have financial markets that demand
discipline from the EU and, in particular, from all
eurozone countries. Markets and market interest rates
don’t allow governments to simply postpone the pain of
solving the debt problem and repairing euro design flaws.
At last, every lender has understood the need to
differentiate the risk along the financial discipline of
individual countries, again forcing weak governments
through high interest rates to get deficit spending and
debt level back under control.
Placating financial markets by eurobonds or ECB
unlimited bond purchases would only have masked
the unsustainable debt issues, trade balance and
competitiveness problems of some eurozone countries –
financial markets in the short term are not focusing on
solving the underlying problem of excessive debt; they
ask only for a guarantor for debt payback. However,
financial markets also see eurozone design flaws – the
contradiction of Maastricht and EBA rules, no rule
enforcement, one interest rate fits all debt, target credit
scheme without reliable collaterals, no integrated fiscal
and economic governance – which led to competitiveness
problems, balance of payment problems and overindebtedness.
First, more comparisons with, and lessons from, the US –
the only federation of states with a common currency –
should be useful. This could be in fixing target credit
schemes, returning to ‘no-bail-out’ or mechanisms to
balance economic cycles between states. Repairing
economic governance design flaws comes next: if the (still
to be ratified 25 times) financial discipline treaty is the
beginning of stronger financial and economic integration
of the eurozone, the real challenge of economic balance
lies in reducing the imbalances of the North and the South
in the eurozone, in avoiding excessive trade imbalances by
improving the competitiveness of the South and by
stimulating imports of the healthy North. Accepting an
economic and finance commissioner for the eurozone
who can enforce financial discipline and true economic
convergence/competitiveness policies may be the
outcome. Finally, an unrelenting EU political drive to reregulate
international financial markets to bring them
back closer to their original role of serving the real
economy is also needed. This is not only to reduce the risk
of future crises: the real economy, in particular industry, is
also paying a high price for the volatility of investor
behaviour, exchange rates and raw material prices.
Differentiate cost reduction and growth measures
If euro politicians follow the turnaround lessons of
industry and make them the success route for the
eurozone, the enforcement of a tough restructuring
programme (as we are seeing it now for many indebted
countries) would be the absolute beginning. Stopping
losses (deficits) and 20%-40% cost reduction may be
needed for some derailed businesses, as well as for some
national economies to become competitive again.
Reducing debt to sustainable levels is similar in both cases
– a long but clearly organised process of asset liquidation,
cash management and debt repayment. However, to
achieve a financially sustainable eurozone again is much
more difficult without growth. Intelligently combining
restructuring and growth – the expert way of a successful
turnaround – may well be best for nations, just as it is
for companies.
The eurozone might differentiate austerity: fast and
radical for problem countries, as is well demonstrated by
Ireland, Greece, Portugal, Spain, and partly Italy and the
UK (detailed measures are well discussed every day in the
press); with similar but delayed steps for healthier growth
countries. For over-indebted countries, deleveraging
should start immediately and continue for 10-15 years:
this is what we are seeing for Greece, Portugal, Italy and
Belgium. This differentiation may include debt forgiveness
or even a bankruptcy in extreme cases where IMF and EU
don’t see a chance for solvency and a country might see
the only chance to restore competitiveness in a sabbatical
from the euro.
Rightly, we see it in a softer way in healthier countries.
Deleveraging the private sector and then stimulating
healthy private sector growth may help deleveraging the
national balance sheets and finally aid the rest of the
eurozone. Specifically in this eurozone crisis, growth
stimulated in healthier countries such as Germany,
Holland, Austria, Scandinavia and Eastern Europe will
help the Southern eurozone countries. There we finally
pull the EU together again in its basic common market
mission. Creating consumer growth in these countries
may be combined with creating investment projects. In
Germany, low interest rates (currently below inflation
rate) stimulate construction investment and consumption,
while consumer growth may result from the recent highpay
increases achieved by the largest unions after a long
series of abstention years.
Reregulate all EU markets
Growth is not only a eurozone or indebted country issue;
it is an overall EU issue. Yet for growth, we need to fix
some decade-old, overall EU problems that affect even
Central and Northern European export countries: lack of
investment, slow growth and poor job generation. Acommon market mission to reduce unemployment and
raise living standards across the EU can’t do without
sustainable economic growth. What we are missing is a 10
year growth and investment programme that can double
the growth potential of the EU. Alas in most countries,
this will need to be ‘smart growth’, that is growth without
additional debt, which is not financed by (now
unavailable) taxpayers’ money – a totally new concept for
National economists, like managers in industries, know
there is no better force to drive investment and growth
than competition. Regulating for competition does not
burden the taxpayer; rather the contrary: competition
drives productivity, innovation and investment to the
advantage of the consumer. The entire common market
EU idea was built on this belief. The European Commission
embarked on making the largest economic zone more
competitive, starting with opening markets, taking away
protection and barriers to entry, creating competition in
nationalised or dormant sectors, and successfully creating
growth and jobs.
However, it can be seen that this job is far from complete.
Lack of competition in many protected sectors,
with regulative restriction of access/supply and resulting
high cost/low productivity and lack of international
competitiveness, are still to be addressed. Why not use
this crisis to complete the common market by
liberalisation of still protected markets for competition?
This includes privatising government holdings,
outsourcing government services to the private sector.
Telecom regulators have learned a lot from successful reregulation
initiatives, where ‘smart regulation’ generates
investment and innovation. These lessons may assist in
finding the right competition regulation for utilities,
medical services and many other professions. It could also
stimulate investment and growth in transport and retail
Moreover, the EU might provide a better playing field for
entrepreneurs and innovators, and encourage cross
border expansion of EU companies and entrepreneurs
with all re-regulative power.
Create longer-term growth driven by investment
Indeed, most mature EU countries, Germany in particular,
have reduced their investment rates as a percentage of
GDP over many decades to end up at the low end of OECD
rankings (only during crisis years did money stay at home
in cash producing EU countries). 18% vs 43% of GDP of
gross capital formation for emerging economies, such as China, shows the EU dilemma: gross fixed capital
formation of EU25 countries was continuously shrinking
from 25% of GDP to 18%, for example in Germany to 17%
in the 40 years till 2009, while China grew investment from
24% to 43% of GDP. This lack of EU investment is not due
to lack of funds; there is an unbelievable amount of
money – trillions of euros – searching for investment
opportunities around the globe every year. It is due to lack
of attractive investment opportunities and conditions in
the EU that drive profitable industries and financial
investors to focus most of their free cash on investment
opportunities outside Europe, mostly in the emerging
BRIC countries.
The only reason why austerity protagonists are hesitating
to think of creating investment-driven growth opportunities
is the fact that Keynesian government funded investment
programmes run against deleveraging priorities of most of
the EU countries, in particular the Southern debt nations.
The path out of this apparent deadlock may be multiple
ways of smart growth that involve a change in the role of
politicians: we have to turn cash-poor governments from
financiers into stimulating regulators of markets, from
investors to orchestrators of projects, and from tax
spenders to attractors of private financing.
Start with reorienting conventional EU investment funds
to increase competitiveness and effective job generation.
They should be combined with incentives to countries
for successful restructuring and building improved
administrations, as in industrial turnarounds where you
invest in the business units that have successfully
restructured. However, then, it means above all mobilising
private funds for EU projects; privatisation; and PPPs,
large and small. There are enough investors – such as
European and international pension funds – looking for
projects with 20 years steady cash flow and returns of 4%-
6%. Infrastructure investors, like Macquarie bank, or even
large private equity funds, such as Blackstone, are looking
for such opportunities. The EU, EBRD, EIB, KfW and other
financiers could issue bonds for long-term projects and
industrial construction while equipment suppliers are
ready to enter PPPs.
The most striking opportunities for the EU to generate
jobs and a better future are infrastructure projects. Most
such projects can be combined with the application of
new technologies. They are also the best opportunity to
mobilise private investors – as started in telecoms, energy
and roads. Similarly, there are energy efficiency/
alternative energy investments in cities, in the industrial
and transport sectors, and also in services. Building the
infrastructure of the future requires the formulation of
more national and international EU investment projects,
for example high-speed rail connections from, say,
Stockholm to Napoli (and others), or HVDC networks to
shuffle energy from low-cost to high-cost countries.
Yet modernising ‘old Europe’ may require much more work
from politicians to overcome obstacles in deeply entrenched
structures and practices. It may start with PPPs,
privatisation, re-regulating many industries and services for
more competition, and eliminating administrative
restrictions; however it will need a new framework for
accelerated planning and execution of EU new technology
infrastructure investment programmes. Moreover in many
cases, it will also mean selling public goods to private
investors and even guaranteeing a reasonable return to
pension funds in some of those projects or issuing specially
secured infrastructure bonds. In return, we will have jobs
without more state debt and a growth base for future
generations. Obviously, politicians won’t be driven into this
role of orchestrators and fundraisers by voters clamouring
for it – but it will require conviction, vision, leadership and
reaching-out for experience.
Create a new EU (and eurozone) spirit
Initiating such a large-scale EU reform and investment
programme may in itself be the way to end the euro
pessimism of many EU citizens and of financial markets.
It would deserve to run under a motto that will be
remembered as a historical success – a competitive
European Union.
On the other hand, the present crisis is the best time for
more EU integration. Never before has a large group of EU
countries been asking for it, of course with the realistic
hope to get more effective help through greater
integration. It is the healthy eurozone states, led by
Germany, who have to urgently develop this strategy for
further integration and who can promise help. Simply
paying paymasters to fix mistakes without laying a good
foundation for sustainable European wealth development
may neither be wise nor enough for the further
development of the European idea.
However, convincing citizens in the eurozone of a large
sovereignty transfer to the centre, in the context of fiscal
and economic integration of the eurozone, may not be
easy. It will need a much stronger vision (more than
avoiding wars in Europe) displaying the advantages of
deeper fiscal/economic integration, of a common
currency and fiscal discipline making deeper European
integration not the choice between two evils (tough
restructuring or failure; trouble or isolation), but make it
an attractive way forward, a common way out of the
problems, a way to investment and growth. The goal is to
create an integrated competitive Europe with full
employment and wellbeing for all Europeans. Revitalised
positive global political EU influence will be a natural
consequence of this.